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Posts Tagged ‘double dip’

ORIGINAL POST, SEE UPDATE BELOW: Earlier we made the argument that the Obama recovery has been much more impressive than the Reagan recovery since A) The conditions Obama inherited were wildly worse and B) Federal government spending under Obama didn’t grow as fast as it did under Reagan.

But we were just looking at Federal Government spending.

Here’s a look at annual government spending growth at all levels: Federal, state, and local.

Here it’s even more lopsided. In Reagan’s first four years in office, government spending grew by at least 7.5%, and in the first two years, government spending grew by over 10% year over year. Obama hasn’t had one year of government spending growth over 7.5%, and the growth in government spending in 2011 appears to be the second smallest is actually the third smallest since WWII.

Although GDP has been mediocre under Obama, he’s achieved a rebound in growth with much less stimulus than Reagan did, and, it should be noted, that despite predictions from many economists, there’s been no double dip, unlike with Reagan.

Again: Obama 1, Gipper 0.

UPDATE: It’s been noted by some that it’s unfair to compare government spending growth under Obama and Reagan this way, since it doesn’t account for inflation, which was obviously much higher in the early 80s.

Using real dollars, adjusting for inflation, we get a slightly different picture, but only just slightly different.

The growth in real government spending during Obama’s first two years were ahead of Reagan’s first two years, but following that, Reagan really kicked it into overdrive, especially in the mid 80s. Government spending, while it got an initial jolt under Obama, is now shrinking at the fastest pace since the late 60s.

Furthermore, at no point has government spending growth under Obama been unusually high, as you can see in the second chart, which dates back to 1947.

And here’s that same chart going back to 1954, which further emphasizes how restrained spending has been under Obama.

Again, given all this, the  economic rebound under Obama looks extremely impressive.

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On November 30th the broad-based China equity ETF, the SPDR S&P China (GXC),  surged up by 6.2%, a marked contrast with the 21.6% decline over the January 1 to November 25 period. In this note we discuss the reasons for the underperformance this year of Chinese equities and their prospects for a return to outperformance in the coming months.

The Chinese economy charged ahead at an unsustainable 10.5% pace in 2010, sparking concerns of rising inflation and the risk of speculative bubbles, particularly in the housing sector. Policy makers responded with more than a year of restrictive policies that slowed the economy and created a credit crunch that has been particularly severe for medium and small firms and that only recently has led to a moderation of inflation.

Global investors as well as domestic Chinese investors appeared to fear that the restrictive policies would push the Chinese economy into a sharp slowdown, a “hard landing.” Adding to those fears was the evident global downturn in manufacturing, the ongoing financial crisis in Europe, and the predictions of some that the US also would experience a return to recession, a “double dip.” The Chinese economy has been affected more significantly by developments in Europe than has the US economy, because of the greater importance to China of manufacturing and trade with Europe. Investors are well aware of this and appear to have priced into Chinese equities a recession in Europe, a development we expect as well.

The Chinese economy clearly is slowing. GDP growth eased to a 9.1% annual rate in the third quarter, following a 9.5% rate in the second quarter. The widely watched purchasing manager’s index, or PMI,
slumped to 49.0% in November. Any dip below 50% is considered a move to contractionary territory. We expect the slowdown to continue into the first half of 2012, with annual GDP growth next year falling to a
still-global-leading rate of around 8.5%. Growth should turn up in the second half, if not sooner, and will likely return to trend in 2013. There are downside risks to this forecast – a collapse of the Eurozone, a recession in the US – but neither of these is in our base-case projections.

Our forecast of a “soft landing” for the Chinese economy is based on the increasing evidence that Chinese economic and financial policies are becoming less restrictive and will likely become expansive in the near future, with increased outlays for infrastructure. Declining inflation is giving the monetary authorities some room for loosening. Yesterday’s (November 30) move to cut the required reserve ratio of large banks by 50 basis points (0.5%) , followed by a week the lowering of the reserve ratio for 20 smaller, rural banks.

Yesterday’s move was likely intended to give several signals. To markets, it signaled a move to ease the credit crunch and support domestic liquidity. Moreover, it was not a coincidence that China made its announcement on the same morning that the other major central banks of the world announced their coordinated action to head off a liquidity crunch for European banks. China could not participate in the swap arrangements directly because its currency is not convertible. Its coincident move to support liquidity in China nevertheless can be seen as complementary to the efforts of the other central banks. China places great importance on the objective of easing the crisis in Europe.

While the soft patch in China’s economy will continue well into 2012, equity markets usually look to the future, and that future is looking brighter. We expect Chinese stocks to regain their relative strength in the coming months. Current valuations look attractive. The P/E ratio for the 172 Chinese firms included in the SPDR S&P ETF, GXC, is 10. In anticipation of improving performance, we have increased the China positions in our portfolios.

Investors have a large number of ETFs that can be used to obtain exposure to the Chinese market and/or its currency. According to the ETF Classification System of Index Universe (www.indexuniverse.com), there are currently 29 China-related ETFs available on the US market – broad equity market, large-cap, small-cap, sectors, fixed-income, currency, leveraged, and inverse ETFs. We wish to use equity ETFs that
have a market capitalization of at least $100 million, and we do not use leveraged or inverse ETFs. That brings the investable universe down to just five: SPDR S&P China (GXC), iShares FTSI China 25 (FXI),
PowerShares Golden Dragon Halter(PGJ), Global X China Consumer (CHIQ), and Guggenheim China Small Cap (HAO). The ETF that was the first available, FXI, has by far the largest market share and hence is very liquid. It invests in the 25 largest Chinese firms traded on the Hong Kong Stock Exchange. This means it is a large-cap ETF; and because it does not include firms that trade on the US market via SDRs, it has more limited sector coverage; in particular, it includes no Chinese technology firms. It is heavily weighted towards large banks and energy firms. The broadest coverage is provided by GXC and PGJ. The
consumer sector ETF, CHIQ, and the small-cap ETF HAO focus on areas that are to receive particular attention in government policies going forward. We are currently using just GXC in our International and
Global Multi Asset Class portfolios but will monitor the development of other available ETFs, including the ones more recently launched and currently too small for us.

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See Also:

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Politicians are masters at “passing the buck.” Everything good that happens reflects their exceptional talents and efforts; everything bad is caused by someone or something else.

The economy is a classic field for this strategy. Three years after the global economy’s near-collapse, the feeble recovery has already petered out in most developed countries, whose economic inertia will drag down the rest. Pundits decry a “double-dip” recession, but in some countries the first dip never ended: Greek GDP has been dipping for three years.

When we ask politicians to explain these deplorable results, they reply in unison: “It’s not our fault.” Recovery, goes the refrain, has been “derailed” by the eurozone crisis. But this is to turn the matter on its head. The eurozone crisis did not derail recovery; it is the result of a lack of recovery. It is the natural, predictable, and (by many) predicted result of the main European countries’ deliberate policy of repressing aggregate demand.

Keep reading ‘The Wages Of Economic Ignorance’ At Project Syndicate >

This post originally appeared at Project Syndicate.

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How does Berkeley professor Brad Delong feel about what’s going on in Europe?

He’s freaking out:

Time to Spread Foam on the Runway: The Federal Reserve Needs to Act Now to Firewall Off the Eurocrisis

I have been complaining for some time now that Reinhart and Rogoff think that the time is always 1931 and that we are always Austria–that the great fiscal crisis is about to erupt and send us lurching down toward Great Depression II.

Well, right now guess what?

The time is 1931, and we are Austria.

The Federal Reserve needs to buy up every single European bond owned by every single American financial institution for cash before the increase in eurorisk leads American finance to tighten credit again and send us down into the double dip. The Federal Reserve Needs to do so now.

Professor Delong cites professor Paul Krugman, who is also freaking out:

This is the way the euro ends.

Not with a bang but with bunga-bunga.

Seriously, with Italian 10-years now well above 7 percent, we’re now in territory where all the vicious circles get into gear — and European leaders seem like deer caught in the headlights. And as Martin Wolf says today, the unthinkable — a euro breakup — has become all too thinkable:

A eurozone built on one-sided deflationary adjustment will fail. That seems certain. If the leaders of the eurozone insist on that policy, they will have to accept the result.

Every even halfway plausible route to euro salvation now depends on a radical change in policy by the European Central Bank. Yet as John Quiggin says in today’s Times, the ECB has instead been part of the problem.

So Europe’s in denial. That leaves the Fed.

(There’s an answer here, by the way: The ECB–or the Fed–can offer unlimited capital to the banks on the condition that they voluntarily restructure (write-down) the debt of every troubled European country to levels that the ECB agrees are reasonable. Then the ECB, or Fed, can provide capital that is senior to all other bank capital, thus reducing the risk that taxpayers will get hammered. That would resolve the crisis. But given the egos and cultures and countries and laws involved, it won’t happen until the world is about to end.

The more likely answer is that the ECB will suddenly be forced into a gigantic bailout in which it “monetizes” huge amounts of debts issued by the troubled countries and keeps interest rates down. This won’t fix the problem–it will just extend it. But it will allow Europe to do what it has done since the beginning: Keep its head stuffed in the sand.)

SEE ALSO: OMG: What Happened Today?

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See Also:

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The International Labour Organization (ILO) has warned that the world economy is heading towards a new jobs recession, which could trigger social unrest in some countries.

The recent slowdown in the global economy is “dramatically” affecting labour markets and it is expected to take at least five years for employment in developed economies to return to pre-crisis levels, according to its “World of Work Report 2011: Making Markets Work for Jobs”.

Raymond Torres, director of the ILO International Institute for Labour Studies, said in a statement: “We have reached the moment of truth. We have a brief window of opportunity to avoid a major double-dip in employment.”

Separately, the Organisation for Economic Co-operation and Development (OECD) is urging G20 leaders to take “bold decisions” when it meets for a summit in Cannes later this week, in order to avoid recession.

The OECD’s comment comes as it is forecasting a sharp slowdown in growth in the euro zone, while warning that some nations in the 17-member bloc could face negative growth.

The OECD is predicting growth of 1.6% in the euro zone this year, with a sharp slowdown to 0.3% in 2012.

This is much lower than the 2% growth it predicted for both years in May.

It is also predicting very weak growth in the UK – many economists have already slashed growth for the UK.

In the meantime, the OECD has revised growth for the US (the world’s largest economy) to 1.7% this year, down from an earlier estimate of 2.6%.

The Organisation is urging G20 leaders to act quickly to restore confidence “and to implement appropriate policies to restore longer-term fiscal sustainability.”